The UK stock market delivered further positive returns in September, with the FTSE All Share index approaching all-time highs towards the end of the month. Despite some anxiety early in the month ahead of the Fed’s policy meeting, the markets recovered their poise as interest rates were again left unchanged. Towards the end of September, OPEC’s announcement of its intention to slightly reduce its oil production levels triggered a spike in the oil price and a rally in commodity-related stocks. Against this challenging backdrop, the fund delivered a marginally negative return.
The largest detractor from performance was Capita, which issued a profit warning towards the end of the month. We have always accepted that there was some cyclicality within Capita’s business but a number of other issues have arisen, some of which are one-off in nature. As you would expect, we have met the management to delve more deeply into the issues that the company faces and are reassured that the company is already doing some of the things it needs to do in order to restore the business to a healthier growth trajectory.
Although the market is clearly worried about the sustainability of Capita’s dividend and the prospect of a dilutive rights issue, we are confident that the dividend is safe and that an equity issue will not be required. Nevertheless, this was clearly a disappointing update from the business but, as is so often the case in these situations, the market’s reaction looks disproportionate. We added slightly to the holding towards the end of the month at a very depressed share price level.
Shares in Next also slipped back following the release of its interim results earlier in the month. The results were in line with expectations and guidance for 2017 was reiterated, but the market appears concerned about the impact that price rises, which result from the weakness of sterling, may have on consumer behaviour next year. Furthermore, the unusually mild autumn has also weighed on Next’s operational performance in recent months with reduced sales of warmer clothing. This is a cyclical factor, however – not something that affects Next’s ability to deliver attractive long-term returns to its investors, in our view.
Among the positive contributors to return were some of our pharmaceutical and biotechnology holdings, led by Prothena and Theravance Biopharma. Both stocks delivered solid returns as their share prices continue to catch up with strongly positive pipeline developments announced in previous months. Elsewhere in the sector, Spire Healthcare’s shares performed well, in response to rumours that international hospital group, Mediclinic, was preparing a bid. Regardless of whether a deal materialises, Spire’s share remain attractively valued and the company is positioned very well in a structural growth market.
Meanwhile, Legal & General, continued to perform well as investors reappraised its outlook in the aftermath of the referendum, concluding that it is not as negatively impacted by the prospect of Brexit as initially feared. Equiniti, which also performed poorly after the referendum, also delivered good returns, buoyed by a number of positive research notes, which helped to highlight the company’s attractions.
Turning to portfolio activity, we introduced two new unquoted holdings during the month. Carrick Therapeutics is an early-stage biotech company which aims to develop novel treatments for the most aggressive forms of cancer. We have been familiar with the company for some time and the credentials of its management team, coupled with the quality of its science, gives us confidence that it can create substantial shareholder value as it builds one of Europe’s leading oncology companies.
Eve Sleep, the premium foam mattress retailer also joined the portfolio during the month. The company has ambitions to develop a global sleep brand with multiple product lines centred on the bedroom and benefits from a strong management team with solid expertise in creating and nurturing early-stage, digital companies.
We also participated in a fundraising for Viamet a drug discovery company which we originally introduced to the portfolio in October 2014. The company’s initial therapeutic focus is on life-threatening fungal infections but its technology platform has broader utility in other indications. We are pleased with the progress the company has made in developing its pipeline and are confident that this latest funding round will enable Viamet to further advance its key programmes towards commercialisation.
Elsewhere, we added to several holdings including Provident Financial, Legal & General and GlaxoSmithKline. In order to fund the above additions, we trimmed our position in Roche very slightly. There were no other disposals.
In terms of outlook, we remain convinced that the portfolio strategy is highly appropriate for the current economic and market environment. Although the market has recently become excited about the prospect of an agreement by OPEC members to cut oil production, we are sceptical. It remains the incentive of all major oil producing nations to maximise production and to achieve the best possible price that they can for that output. It is questionable, therefore, whether the agreement that has been proposed can ultimately be reached and doubtful that it would be adhered to.
In the meantime, demand fundamentals for oil, and indeed other commodities, remain fragile and deteriorating. As such, we continue to avoid resource-related stocks and focus on investment opportunities that are more in control of their own destiny. In the challenging world that lies ahead, many businesses will struggle but we are confident that the portfolio is well-positioned to deliver attractive long-term returns in a low growth environment.
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The views expressed in this article are those of the author at the date of publication and not necessarily those of Woodford Investment Management LLP. The contents of this article are not intended as investment advice and will not be updated after publication.
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